Capital Gains Tax on Real Estate in Washington State

No, Washington’s state capital gains tax does not apply to real estate. When you sell a home, a rental, or commercial property in Washington, the state’s 7% capital gains tax does not touch your profit. The Department of Revenue lists real estate as an exempt asset, so a property sale never triggers that tax, no matter how long you owned it.

Two taxes do apply when you sell. The first is federal capital gains tax on your profit: 0%, 15%, or 20%, plus a possible 3.8% net investment income tax and depreciation recapture on rentals. The second is the Washington Real Estate Excise Tax (REET), a graduated tax the seller pays on the sale price. A 1031 exchange defers the federal capital gains tax and the depreciation recapture when you reinvest in a like-kind property, though REET still applies to the sale.

Universal Pacific 1031 Exchange has spent 35+ years guiding investors across Washington and beyond through tax-deferred exchanges. We are a trusted Qualified Intermediary in Washington with experience handling complex transactions, applying the tax rules, and structuring 1031 exchanges for IRS compliance. Book a free consultation to get started.

Below, each tax is broken out on its own so nothing gets conflated: what Washington exempts, what the IRS still charges, what REET costs you at closing, and how a 1031 exchange defers the federal bill.

Does Washington’s Capital Gains Tax Apply to Real Estate?

No. Washington does not charge a capital gains tax on real estate sales. The state is one of nine with no personal or corporate income tax. In 2021 the Legislature passed ESSB 5096, creating a 7% tax on the sale of certain long-term capital assets, and in 2023 the Washington Supreme Court upheld it as an excise tax rather than an income tax. Real estate was carved out from the start.

The Washington Department of Revenue names real estate directly on its exempt list, alongside interests in a privately held entity to the extent the gain traces to real estate the entity owns. The tax instead falls on intangible assets like stocks, bonds, business interests, and mutual fund shares, plus tangible personal property such as collectibles and art.

For 2025 the tax reaches only individuals, applies only to gains above the $278,000 standard deduction (indexed each year), and runs at a tiered rate: 7% on the first $1 million of taxable gain and 9.9% above that after May 2025’s Senate Bill 5813. A single-member LLC is disregarded, so its gains pass through to the owner. None of this touches a real estate sale.

Property owners still owe ad valorem property taxes (averaging 0.76%–0.88% of assessed value statewide) and, at death, the Washington estate tax if the estate exceeds $3 million. Both are separate from any tax on the sale itself.

Are There Capital Gains Exemptions in Washington?

Washington’s capital gains excise tax carries several exemptions, and the one that matters most to real estate investors is the biggest: every real estate transaction is excluded. Sell a primary residence, a rental, or a commercial building, and the gain sits outside Washington’s 7%–9.9% capital gains tax entirely.

Important update (2025): beginning with tax year 2025, Washington moved to a tiered rate under SB 5813. The first $1 million of taxable Washington capital gains is taxed at 7%, and anything above $1 million carries an extra 2.9% surcharge for a 9.9% top rate. The standard deduction rose to $278,000, indexed annually.

The tax also skips certain charitable donations and other tangible and intangible assets: retirement accounts, qualified small business stock, commercial fishing privileges, timber, and livestock used in farming. Corporations are off the hook entirely, since the tax reaches only individuals. And an individual’s Washington capital gains are taxed only above the $278,000 standard deduction. Gains on property sold outside the state fall outside the tax unless they tie back to Washington-based activity.

Federal Capital Gains Tax on a Washington Property Sale

Washington’s exemption stops at the state line. The IRS still taxes the profit on your sale. Capital gains tax is the tax on the profit from selling an asset, whether real estate, stocks, bonds, or a business interest. Your gain is the sale price minus your adjusted basis: what you paid, plus capital improvements and selling costs, minus depreciation.

The rate turns on how long you held the property. Sell within a year and the profit is a short-term gain, taxed as ordinary income at 10%–37%. Hold longer than a year and it becomes a long-term gain, taxed at 0%, 15%, or 20%. Higher earners add a 3.8% Net Investment Income Tax once modified adjusted gross income passes the IRS threshold for their filing status.

Rental and investment property carries one more layer: depreciation recapture. The depreciation you deducted over the years gets taxed when you sell. Unrecaptured Section 1250 gain is taxed at up to 25%, separate from the 0/15/20% rate on the rest of the profit. That recapture is a big reason rental owners turn to a 1031 exchange.

How Does Federal Capital Gains Tax Apply to Real Estate Sales?

Federal capital gains tax hits a real estate sale once the net profit clears the property’s adjusted cost basis and selling expenses. Adjusted cost basis is the purchase price plus capital improvements and allowable selling expenses, minus depreciation. You owe the tax on that net profit whether or not any state-level tax applied.

Most investors hold longer than a year to land the lower 0%–20% long-term rate instead of the 10%–37% ordinary rate on short-term gains. Your exact long-term rate depends on filing status and income:

Washington Real Estate Excise Tax (REET)

Washington may skip your capital gain, but it taxes the sale itself. The Real Estate Excise Tax applies to nearly every property transfer in the state, and the seller pays it. REET is figured on the full sale price, not your profit, so you owe it even on a sale that breaks even or loses money.

The state rate is graduated (effective January 1, 2023):

Agricultural land and timberland stay at a flat 1.28% no matter the price. Most cities and counties add a local REET on top of the state rate, commonly 0.25%–0.5%. On a $700,000 sale, the state portion runs about $8,000 before any local add-on, so check your county’s combined rate before you close. Confirm current tiers on the DOR REET page, since the brackets are adjusted periodically.

How a 1031 Exchange Defers Federal Capital Gains Tax

A 1031 exchange lets a Washington real estate investor defer federal capital gains tax, and the depreciation recapture along with it, by reinvesting the sale proceeds into a like-kind property. Washington already exempts real estate from its capital gains tax, so the deferral you’re capturing is the federal bill, which is where the real money sits.

One thing a 1031 exchange does not do is erase REET. The sale of your relinquished property is still a transfer, so Washington’s excise tax generally applies even inside an exchange. Budget for it as a closing cost.

Deferring tax this way keeps more capital working and lets your portfolio keep compounding, but the process runs on strict IRS deadlines. You have 45 days after selling the original property to identify replacement properties, and 180 days from the sale to close on the new one.

The IRS also requires a Qualified Intermediary (QI), because you cannot touch the sale funds yourself. The strategy can be repeated multiple times and across different states, deferring tax indefinitely as long as you keep acquiring like-kind property. A 1031 can also defer income or excise tax in certain states, so confirm the local rules before you proceed.

What Are the Eligibility Requirements for a 1031 Exchange?

To qualify, both the property you sell and the one you buy must be held for investment or business purposes. Primary residences, second homes, and vacation homes not held for business do not qualify.

The properties also have to be like-kind, which refers to their nature or character rather than their quality or type. You can swap an apartment building for a strip mall or raw land, as long as both are held for investment.

The 45-day and 180-day timelines apply here too. A Qualified Intermediary is non-negotiable; skip one and the exchange is disqualified. Both properties must sit within the US, and you report the exchange to the IRS on Form 8824 with your return. Miss any requirement and you owe capital gains tax in the year the exchange happened.

How Do I Calculate Capital Gains on Real Estate Sales in Washington State?

Washington generally doesn’t tax capital gains on real estate, but the math still matters for your federal return and for any non-real-estate assets that do fall under the state excise tax. Here’s the step-by-step:

1. Determine your adjusted basis. Start with what you paid, then add closing costs, commissions, and capital improvements. Routine upkeep like painting and minor repairs doesn’t count; only work that adds value or extends the asset’s life does. So adjusted cost basis = purchase price + closing costs + capital improvements − depreciation.

2. Identify the net selling price. This is what you received after selling expenses: realtor commissions, title and escrow fees, Qualified Intermediary fees, and legal fees.

3. Subtract basis from net selling price. Once every allowable expense is accounted for, subtract the adjusted cost basis from the net selling price. Capital gain = net selling price − adjusted basis.

4. Apply any exemptions or exclusions. If the property was your primary residence for two of the last five years, you can exclude up to $250,000 (or $500,000 if married filing jointly) of gain. Capital losses can offset long-term gains too. What’s left is your taxable gain.

For an accurate figure, run the numbers through software like TurboTax or work with a tax advisor to line up deductions, exclusions, and reporting under both federal and state rules.

Filing and Paying Capital Gains Tax in WA

If you owe Washington’s capital gains excise tax, you file a state return with the Washington Department of Revenue by April 15 following the taxable year, the same deadline as your federal return. Filing runs through your state account on the WA DOR portal.

You’ll attach your federal return (Form 1040 with Schedule D), details of your long-term asset sales, and records for any deductions or exemptions you claim, such as business interest exclusions or charitable donations.

Penalties and interest apply if you miss the deadline or underreport. Intentional failure to file can bring steeper fines or enforcement, so keep clean records and bring in a tax advisor for anything complex.

What Strategies Can Reduce or Defer Capital Gains Tax in Washington?

As a Washington seller, you can cut or defer the federal capital gains tax several ways:

• Use the primary residence exclusion: Section 121 of the Internal Revenue Code lets home sellers exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly, as long as the home was your primary residence for two of the last five years.
• Complete a 1031 exchange: defer the federal capital gains tax and depreciation recapture by reinvesting the proceeds from an investment property into another like-kind property. You’ll need to work with a Qualified Intermediary and follow the IRS timelines.
• Hold long enough for long-term rates: gains on assets held over a year are taxed well below the short-term ordinary rates. Unless you’re flipping, don’t sell before the one-year mark.
• Deduct selling costs: subtract commissions, title fees, and improvement costs from your profit to shrink the taxable gain. Ask your advisor which other expenses apply to your sale.
• Offset gains with losses: if you sold other investments at a loss, use them to cancel out some or all of your capital gains.
• Watch your timing: selling in a lower-income year can drop you into a lower federal bracket. And don’t miss an IRS deadline, because the penalties are steep.
• Charitable deductions: both the IRS and Washington’s tax system reward charitable giving. Donations to child-care programs, school construction, and similar causes can lower your bill.
• Real Estate Investment Trusts (REITs): property routed through REITs gets pass-through federal treatment and no corporate income tax. State-level benefits depend on the jurisdiction.
• Talk to a professional: a CPA, tax advisor, or Qualified Intermediary can surface exemptions and credits you’d miss and keep your plan current with Washington’s rules.

How Do I Report Capital Gains From Real Estate Sales on My Taxes?

To report the gain from a real estate sale, complete IRS Form 8949 and Schedule D on your federal return, entering the sale price, adjusted basis, and expenses.

If you received a Form 1099-S reporting the transaction to the IRS, make sure your figures match it. Washington doesn’t require separate capital gains reporting for real estate sales, since those transactions are exempt from the state excise tax.

Watch for changes to state law, file on time to dodge late penalties, and hold onto every record tied to the purchase, improvements, and sale for at least three years in case of an audit.

Want to Defer Your Real Estate Capital Gains Taxes?

Real estate is exempt from Washington’s capital gains tax, but the federal bill doesn’t go away. If you’re a Washington investor who wants to keep more profit and grow a bigger portfolio, a 1031 exchange defers that federal capital gains tax.

At Universal Pacific 1031 Exchange, we help investors, first-timers and veterans alike, work through a tax-deferred exchange. With deep experience across taxing jurisdictions, we help you plan, stay compliant, and keep more capital working. Stop by our 1031 exchange office or start an exchange today.

Accuracy & Sources Disclaimer

The information in this article is sourced from official government publications and is accurate to the best of our knowledge as of the last update on July 9, 2026. All claims can be independently verified through the sources listed below:

Federal Sources:

• IRS Topic No. 409 — Capital Gains and Losses
• IRS Topic No. 701 — Sale of Your Home
• IRS Publication 523 — Selling Your Home
• IRS Net Investment Income Tax (NIIT)
• IRS Like-Kind Exchanges Under IRC Section 1031
• IRS Form 8824 — Like-Kind Exchanges
• IRS Form 8949 — Sales and Other Dispositions of Capital Assets
• IRS Schedule D — Capital Gains and Losses
• IRS Tax Year 2025 Inflation Adjustments

Washington State Sources:

• RCW 82.87 — Washington Capital Gains Tax Statute
• Senate Bill 5813 (2025) — Capital Gains Tax Amendments
• Washington DOR — Capital Gains Tax (real estate exemption)
• Washington DOR — Real Estate Excise Tax (REET)
• Washington DOR — Estate Tax
• Washington DOR — Property Tax
• Quinn v. State — WA Supreme Court Opinion (2023)

Tax laws change at both the federal and state level. This content is for informational purposes only and is not tax, legal, or investment advice.

FAQ

Capital gains tax on Washington real estate trips people up because the state mixes an exemption, an excise tax, and federal rules. Here are the questions we hear most.

How Much Is Capital Gains Tax on Property in Washington State?

Washington doesn’t tax capital gains on the sale of real estate, whether it’s your primary home, a rental, or commercial property. It does tax gains on stocks, business interests, bonds, and other long-term assets at 7% to 9.9%, with a $278,000 standard deduction for 2025.

Do I Pay Taxes When I Sell My House in Washington State?

Yes. You’ll owe federal capital gains tax on the profit and the Washington Real Estate Excise Tax (REET), which runs from 1.1% to 3% of the sale price at the state level plus any local add-on. Washington does not charge a state capital gains tax on real estate.

What Is the New 7% Capital Gains Tax in Washington State?

It’s an excise tax enacted in 2021 on sales of certain tangible and intangible personal property. Individuals whose qualifying gains top the $278,000 standard deduction pay 7% to 9.9% to the state. You can owe it as a non-resident if the earnings tie to Washington activity. The Washington Supreme Court upheld it as an excise tax, not an income tax. Real estate is exempt.

How to Avoid Washington State Capital Gains Tax?

Real estate is already exempt. For other assets, you can lower or eliminate the tax by:

• Staying below the $278,000 standard deduction
• Selling in a lower-income year
• Using charitable donations or capital loss harvesting

Are There Any Recent Changes to Washington’s Capital Gains Tax Laws?

Yes. Tax year 2025 added a tier: 7% on gains above the $278,000 standard deduction up to $1 million, and 9.9% on anything over $1 million. SB 5813 also adjusted credits and retirement and small-business exemptions starting January 1, 2026. Voters rejected Initiative 2019, which would have repealed the tax, in November 2024.